Key Takeaways
Refinancing surged to nearly two-year highs last week as the average mortgage interest rate fell to 6.87%. High interest rates are slowing the housing market, making it difficult to buy a home and undesirable to sell. Mortgage rates are likely to continue to fall as the Federal Reserve gets closer to lowering interest rates.
Refinancing surged last week as many homeowners took advantage of lower mortgage rates to reduce interest payments on their existing mortgages.
The average interest rate on a 30-year fixed-rate mortgage fell to 6.87% last week, the lowest since March, according to the Mortgage Bankers Association. That pushed refinancing to the highest level since August 2022, according to the MBA's Weekly Mortgage Applications Index.
High interest rates have stymied the housing market over the past two years, with potential buyers being put off by high monthly payments and sellers hesitant to put their homes on the market after taking advantage of ultra-low mortgage rates over the past few years.
How the Federal Reserve is making refinancing more attractive
But with interest rate cuts from the Federal Reserve on the horizon, mortgage rates may be trending lower.
There are two main factors that affect mortgage rates: the yield on the 10-year Treasury note and the federal funds rate. As the Federal Reserve gets closer to cutting the federal funds rate, traders are attracted to longer-term bonds, causing the price of the 10-year Treasury note to rise and mortgage rates to fall (bond prices and yields move in opposite directions).
Mortgage rates could fall further if the Federal Reserve cuts key interest rates, which market participants are confident the Fed will start cutting rates by September.
Home purchase applications continue to be delayed
Much of the increased refinancing activity last week came from government-backed loans, such as Federal Housing Administration (FHA) and Veterans Affairs (VA) loans, which typically have lower-than-average interest rates.
“FHA and VA refinance applications accounted for much of the increase, but these were likely recently originated loans at even higher interest rates than are currently being offered,” said Joel Kan, MBA vice president and deputy chief economist.
While refinancing surged, home purchase applications remained sluggish, down 3% from the previous week and 14% from a year ago.